Dell's dubious decision to go private

Wednesday

Feb 6, 2013 at 6:00 AM

By Peter S. Cohan WALL & MAIN

Wall Street breathlessly-awaited wishes came true Tuesday morning, with Dell’s announcement of a big leveraged buyout. While plenty of people praise the deal, Michael Dell’s track record since 2000 does not inspire confidence in his company’s future.

Big headlines are trumpeting this pending transaction. For example, the New York Times was thrilled to announce the $24.4 billion price tag — which it dearly hopes will revive the dormant business of borrowing huge sums to buy companies, sell off their pieces, repay the debt and leave the equity holders with much more cash than they put into the deal.

And if the deal closes, Mr. Dell would remain in charge of the custom PC-maker he founded in his Austin dorm room in 1984.

He will invest his 14 percent share — worth $3.8 billion plus Dell’s offshore cash. Silver Lake Partners will toss in $1 billion and Dell supplier, Microsoft, will supply $2 billion in preferred shares or debt. That would leave as much as $16.8 billion to be raised from somewhere else — presumably banks and other debt vendors.Now cue up the Internet-praise chorus. Here are some samples:

• “[The deal] will allow [Dell] to do things in private without sharing the intimate financial details,” John Abbott, chief analyst at the 451 Group, told ComputerWeekly.

• “[Dell] has no choice but take the drastic step of going private, and then it can be redesigned or re-engineered or sold off for parts,” exclaims MarketWatch.

• “Going private will give Dell the time and breathing room it needs, without having to explain to impatient shareholders every quarter why it hasn’t built a better iPad,” concludes Infoworld.

The truth is that Mr. Dell is a great example of a founder who long-ago outlived his usefulness as CEO. For example, Dell’s stock price peaked in March 2000 and has lost 76 percent of its value since then.

For a similar example of a CEO/co-founder who should have been tossed out years ago, you have to look no further than Microsoft, which proposes to invest in this going private transaction. Steve Ballmer has presided over a stock price that has barely budged since he took over from his pal, Bill Gates, in January 2000.

In Dell’s case, the 1990s was a great time to be in the business of selling customized PCs directly to companies. Dell was competing with companies such as Compaq that sold PCs through retailers. But Dell sold directly to companies using its website.

This meant that Dell did not have to include the cost of the retail channel in its prices, according to the Harvard Business School case, "Matching Dell," that I used to teach. This was just one of the many advantages Dell enjoyed during this time, which enabled it to charge higher prices and make PCs at a lower than industry-average cost.

But the collapse of the dot-com bubble meant that companies stopped buying so many PCs. (In 2012, for example, Dell sold 37.6 million PCs worldwide – that sounds like a lot but it’s 12.3 percent fewer than the year before, according to Gartner). In the 2000s, the biggest PC consumers were individuals who wanted to see machines operating in retail stores before buying them.

Mr. Dell recognized that business IT spending was off but he decided double-down on business customers. So he made scores of acquisitions — including service provider, Perot Systems, with the intent of turning Dell into a full-service provider of hardware, software, and services.

In short, Dell is trying to become another IBM. This brings up two obvious points that the Dell-going-private praise chorus seems to have missed:

• Stuck in the middle. Companies can’t win by doing a pale imitation of a dominant competitor’s strategy. But that is exactly what Dell is trying to do by making acquisitions to add to its product and service line. These deals are not making Dell more formidable than IBM in the eyes of customers. Dell is simply not as good at executing IBM’s strategy.

• Going private does not help. For those who may have forgotten, IBM went through its own near-death experience in 1993. But IBM accomplished a transformation thanks to Lou Gerstner as a public company. While Dell’s stock was plunging, IBM’s rose almost as much as Dell fell – up 73 percent since March 2000.

Dell should give up trying to be a second-rate IBM. Even though the market is shrinking, plenty of people still buy PCs. And Dell’s best hope may be to turn itself into the world’s lowest cost producer of them.

To do that would require a new CEO — Dell’s plunging stock price and frustrated workforce suggest he has outlived its usefulness — and a transformation of its supply chain so that it could get its costs below those of Lenovo and Acer.

This is a very tall order, but there is no way that going private will help Dell become better than IBM.